9911796707
TMI Blog2022 (7) TMI 1328X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions of manufacture of inter connectors, fibre optical wires carried out by the assessee on behalf of its AE is concerned, it is not in dispute that it is an international transaction to which the provisions of section 92 of the Act apply. The assessee also trades in AMP Netconnect cables and switches which are used in providing IT networking solutions to commercial premises. The assessee buys interconnectors from Tyco group and sells them to auto ancillaries in India and to various other industrial schemes. The assessee is also engaged in sourcing of raw materials and components from Asia-Pacific region for Tyco group. These services are provided based on service agreement entered with Tyco Plastics LP. 4. The international transactions entered into by the assessee with its AE are broadly classified into two segments; Contract manufacturing segment and License manufacturing segment. In respect of the assessee's claim that the price received by the assessee from its AE for the services rendered in the form of carrying out license manufacturing activity and contract manufacturing activity are at arm's length, the assessee filed a TP study adopting Transactional Net Margin Metho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 is regarding disallowance of liquidator damages. (xi) Ground Nos.28 to 30 relate to disallowance made against consideration received on slump sale. (xii) Ground Nos.31 & 32 are of consequential nature. 8. First we will take up the adjustment made by the TPO in the License manufacturing segment. The segmental financials of the assessee as per P&L account are as follows:- Particulars Manufacturing interconnectors, fibre optical wires Sales & Service income 500,81,58,396 Cost materials 282,39,65,287 Employee expenses 70,93,73,282 Other operating expenses 104,17,13,267 Depreciation 15,65,44,543 Less: Total cost 473,15,96,380 Operating profit 27,65,62,018 Operating profit/Sales 5.52% 9. The assessee selected the following comparables and arrived at an average margin of 5.80% on sales S.No. Name of the company OP/OR (%) 1. Akasaka Electronics Ltd 3.63 2. Centum Electronics Lts 5.66 3. Circuit Systems (India) Ltd 2.98 4. Cosmo Ferrites Ltd 8.78 5. EasunReyrolle Ltd 5.39 6. Incap Ltd 2.87 7. Kaycee Industries Ltd 5.39 8. MMG India Pvt Ltd 6.21 9. Ruttonsha International Rectifier Ltd 11.29 Average 5.80 Since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility criteria. Erroneously rejected by the learned TPO/ learned DRP, sought to be included by the Appellant * Incap Limited * Kaycee Industries Limited * Ruttonsha International Rectifier Limited * Easun Reyrolle Limited Erroneously accepted by the learned TPO/ learned DRP, sought to be rejected by the Appellant * Jtekt Sona Automotive India Limited * Roots Industries India Limited * Roop Telesconic Ultrasonix Limited. * Remi Elektrotechnik Limited." 13. During the course of hearing the ld AR did not press for the following (i) Inclusion of MMG India Private Limited and Easun Reyrolle Limited (ii) Exclusion of JtekSona Automotive India Ltd., Roots Industries India Ltd., and Remi Elektrotechnik Ltd. 14. Before us, the ld. AR submitted that the coordinate Bench of the Tribunal in the case of Affinity Express India Pvt. Ltd. in ITA No.107/PN/2012 dated 9.3.2016 has held that only a company that is incurring persistent loss for 3 consecutive years cannot be considered for comparability. In the present case, four comparables have profits in certain years as submitted before the DRP as under:- S.No. Name of the comparable Operating profit margin for FY R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y for necessary, which is profit making one, there is a need for more attention qua the conditions prescribed in clause (a) to (d) of Rule 10B(2) of IT Rules, 1962 for an ultimate judgment of comparability of impugned transaction . So, the persistent loss making means continuous loss making for more than 3 years but in the case before us i.e. Stovec has earned a margin of 2.39% in comparable segment in F.Y. 2003- 04. Hence, it could not be considered as loss making, so the same should be excluded for computing operative margin of comparable companies for arriving at ALP in relation to international transactions pertaining to EOU operations. The Assessing Officer is directed accordingly." 14. The contention of the Revenue is that results of the aforesaid two comparable entities are on the extreme negative side. Therefore, they should not be considered. The Hon'ble Delhi High Court in the case of Chryscapital Investment Advisors (India) (P.) Ltd. Vs. DCIT (supra) after considering various decisions of the Tribunal and the judgment of division bench of the Hon'ble Delhi High Court in the case of CIT Vs. Mentor Graphics (Noida) (P.) Ltd. reported as 354 ITR 586 concluded as u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17. In the given case, we notice that the three of the comparable companies in the FY 2011-12 & one company in 2012-13 and have earned profits and therefore following the ratio laid down in Affinity Express India P Ltd (supra), we hold that these companies should be included for the purpose of comparability and computation of ALP. 18. The other companies sought for inclusion vide ground No.7 by the assessee are Incap Ltd., Kaycee Industries Ltd. & Ruttonsha International Rectifier Ltd. The TPO rejected the above companies on the ground that there is no data available with respect to these companies in the public domain. In the objections raised before the DRP, the assessee submitted that at the time of TP documentation the details of these companies were extracted from the public domain and furnished before the TPO and prayed for its inclusion before the DRP. 19. The DRP without giving any reasons and not appreciating the real issue rejected the submissions of the assessee and confirmed the TPO's order. 20. Before us, the ld. AR submitted that the relevant financial statements of the comparable companies for AY 2012-13 is available in the public domain and same was submitted befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attention to relevant extract of P&L account of this company at Pg.231 of PB to submit that the product sold by that company mainly consist equipments. Therefore there was no functional comparability between the assessee and that company and therefore it has to be excluded from the comparables. 26. The ld. DR relied on the orders of the lower authorities. 27. We have considered the rival submissions and perused the material on record. Before we go into the facts, we will look at the Rule 10B (1) (d) which states as under 10B . (1) For the purposes of sub-section (2) of section 92C, the arm's length price in relation to an international transaction [or a specified domestic transaction] shall be determined by any of the following methods, being the most appropriate method, in the following manner, namely :- ****** (e) transactional net margin method, by which,- (i) the net profit margin realised by the enterprise from an international transaction [or a specified domestic transaction] entered into with an associated enterprise is computed in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d and uncontrolled transactions, it is necessary to compare the significant risks that could affect prices or profits. The risk involved for a company involved in manufacturing of equipments would be significantly different from the component manufacturing company. The assessee is a manufacturer of components and therefore cannot be compared with an equipment manufacturing company as per the principle laid down in Rule 10B(2)(b). In view of the above discussion, we hold that Roop Telsconic Ultrasonix Ltd. is functionally different from the assessee and cannot be included as a comparable. It is directed to be excluded from the comparables. Contract manufacturing segment 29. The segmental financials of the assessee in contract manufacturing segment are as follows:- Particulars Tools manufacturing division Sales & Service income 36,20,33,053 Cost materials 21,67,97,561 Employee expenses 4,82,32,767 Other operating expenses 7,44,81,454 Depreciation 1,81,96,933 Less: Total cost 35,77,08,715 Operating profit 43,24,338 Operating profit/Sales 1.21% 30. The assessee selected two comparables and arrived at average margin of 4.22% to conclude that the margin of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not factually correct. 36. We notice that this company is into manufacture of machine tools as can be seen from the disclosure of principal product and services as given below:- [Ref: P&L account of Electronica - Pg. 250] 37. We also notice that the lower authorities have not taken into consideration the submissions and details produced by the assessee and have rejected the claim based on incorrect facts. In view of this, we remit this issue back to the AO/TPO to take into consideration the various details submitted by the assessee, analyse the data from the public domain and for fresh decision in accordance with law, after providing opportunity of being heard to the assessee. 38. The ld. AR did not press for exclusion of T&I Global Ltd. during the course of hearing. As regards exclusion of Vikram India Ltd., the TPO after a fresh search of comparables included it as comparable company on the ground that this company is into manufacture of machine tools. The assessee submitted before the DRP that this company is engaged in manufacture of processing machinery tools and spare parts and accessories and also involved in trading activities. The highest contributing product as dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons: (i) The daily working capital levels of the tested party and the comparables was the only reliable basis of determining adjustment to be made on account of working capital because that would be on the basis of working capital deployed throughout the year. (ii) Segmental working capital is not disclosed in the annual reports of companies engaged in different segments and therefore proper comparison cannot be made. (iii) Disclose in the balance sheet does not contain break up of trade and non-trade debtors and creditors and therefore working capital adjustment done without such break up would result in computation being skewed. (iv) Cost of capital would be different for different companies and therefore working capital adjustment made disregarding this different based on broad approximations, estimations and assumptions may not lead to reliable results. 16. The CIT (A) also placed reliance on a decision of Chennai ITAT in the case of Mobis India Ltd. v. Dy. CIT [2013] 38 taxmann.com 231/[2014] 61 SOT 40. That decision was based on the factual aspect that the Assessee was not able to demonstrate how working capital adjustment was arrived at by the Assessee. Therefore n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Regarding absence of cost of working capital funds, the OECD guidelines clearly advocates adopting rate(s) of interest applicable to a commercial enterprise operating in the same market as the tested party. Therefore this objection of the CIT (A) is also not sustainable. 17. In the light of the above discussion we are of the view that the CIT (A) was not justified in denying adjustment on account of working capital adjustment. Since, the CIT (A) has not found any error in the TPO's working of working capital adjustment, the working capital adjustment as worked out by the TPO has to be allowed. We may also add that the complete working capital adjustment working has been given by the Assessee and a copy of the same is at pages 173 & 192 of the Assessee's paper book. No defect whatsoever has been pointed out in these working by the CIT (A). We may also further add that in terms of Rule 10B(1)(e) (iii) of the Rules, the net profit margin arising in comparable uncontrolled transactions should be adjusted to take into account the differences, if any, between the international transaction and the comparable uncontrolled transactions which could materially affect the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine the arm's length price of this international transaction. d) That the learned DRP erred in law and in facts, in upholding the approach of the learned AO/ learned TPO in adjudicating on the legitimate need of the business and the quantification of expenses on the principles of arm's length." 47. Identical issue came up for consideration in the assessee's own case for AY 2014-15 and the Tribunal vide order dated 25.02.2022 in IT(TP)A No.3373/Bang/2018 held as under:- "14. Grounds 9 to 12 of the concise grounds of appeal are with regard to determination of ALP in respect of Information Service (IS) charges and corporate service charges Segment. The assessee paid a sum of Rs.33,41,55,226/- to its AE. The assessee submitted that it received IS services from Tyco Electronics Corporation, USA, an AE, for which it made the payment. TE Group and its overseas entities, during the year under consideration, was in the business of manufacturing and distributing products and systems for a broad set of markets namely (a) Electronic components, (b) Network solutions, (c) Wireless Systems and (d) Undersea telecommunications. TE Group, being a global company, present in multiple c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... based in Harrisburg, Pennsylvania, with other centers at Fuquay-Variana, North Carolina, US (Manufacturing-Pro) and in Singapore (AMPICS). Post the implementation of the SAP ERP, TE Group provided hardware, software and applications to run TECIL's SAP applications, including Financial, Sales & Distribution, Purchasing, SAP Shop Floor User Fee and SAP Development and Consulting. The Group also helped to develop and support TECIL's Global SAP system (PR2/APO) and the TE US HR/ Payroll System (HRP). In addition, TEIS team members supported the certified softwares: Xelus, Vertex and Firmware. It also supported legacy US Manufacturing finance and EDI applications. The charges pertained to licence fee/ usage fee for the software, hardware and other applications. In addition to the above, TE Group provides various other IT Infrastructure support services the details of which were also given to the TPO. 15. The TPO, however, did not accept the plea of the assessee. He held that in terms of Rule 10B of the Income Tax Rules, 1962 (Rules), the determination of ALP for providing intergroup services has to be decided either by applying the Comparable Uncontrolled Price (CUP) or TNMM. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all proved the second aspect. This issue is discussed below." 16. The TPO thereafter called upon the assessee to explain as to how the services are quantified under each head or expense under IS charges for which the assessee could not give a proper answer. The TPO therefore proceeded to hold that the ALP of the IS charges was NIL and therefore the entire payment made by the assessee by the assessee to its AE had to be considered as adjustment of determination of ALP under section 92CA of the Act. Accordingly, the AO added as sum of Rs.33,41,55,226/- to the total income of the assessee. The DRP confirmed the order of the AO. 17. Before the Tribunal, the learned Counsel for the assessee has filed an application for admission of the following documents as additional evidence: Sl. No. Particulars Page No. 1 Report on Information Services received from Tyco Electronics Corporation, US 1-55 2 Sample copies of related invoices 56-72 The learned counsel for the Assessee submitted that the allegation that no documentation / information was furnished by the Assessee before the lower authorities is incorrect. He gave the details of documents/information filed before the TP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er TNMM. Hence, the upward TP adjustment for the said segment factors the adjustment for the IS and corporate charges as well. The TPO shall therefore not make further adjustment in this regard, as it would result in a double adjustment. It was submitted that the aforesaid view was upheld by the following judicial pronouncements: iii. Further, the margin for the distribution and services segments, which factors the above charges in the cost-base, were accepted to be at arm's length by the TPO. In view of this, the TPO cannot arbitrarily reject its aggregation only in respect of the license manufacturing segment. iv. Without prejudice, if the separate benchmarking of IS and corporate service charges is upheld, the same shall be excluded from the segment costs considered under the licensed manufacturing segment, for margin determining. In such event, the margin as computed in the TP order in this regard, at -0.80% will increase to 3%, as shown below: 19. Without prejudice to the above contentions, it was contended that the TPO has failed to undertake a benchmarking analysis based on comparable transactions which is a mandatory requirement for the application of the CUP method, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... val submissions and are of the view that the issue with regard to determination of ALP in respect of payment of IS charges should be set aside to the AO/TPO for fresh consideration denovo in the light of the submissions and additional evidence filed before us and these submissions and additional evidence go to the root of the matter. The AO and TPO will afford opportunity of being heard to the assessee in the set aside proceedings. 48. In the present case, the ld. AR submitted a detailed report from the AE in the form of additional evidence in a separate PB and prayed for admission of additional evidence. We admit the additional evidence since it goes to the root of the matter. 49. The ld. AR also submitted that if separate benchmarking is to be done in respect of intra-group services, then the effect of the same should be given in the operating cost considered for PLI purposes. We see merit in the submission of the ld. AR and direct the TPO/AO accordingly. 50. Ground No. 10 is as follows:- "10. That the learned DRP has erred, in law and in facts, in upholding the approach of the learned AO/ Learned TPO in not granting proportionate adjustment, thereby ignoring the fact that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hould be restricted only to the international transactions with the AE. This ground is allowed in favour of the assessee. Corporate tax issues 53. The assessee has raised ground Nos.11 to 18 regarding depreciation and additional depreciation as follows:- "11. That on the facts and circumstances of the case, the learned AO/ learned Dispute Resolution Panel (learned DRP') has erred in disallowing depreciation amounting to INR 2,21,15,523/- claimed by the Appellant on additions made to fixed assets during the Financial Year (`FY') 2012-13. 12. That the learned AO/learned DRP has erred in not appreciating the fact that the twin conditions for claiming depreciation were duly satisfied in the case of the Appellant i.e., the fixed assets were owned by the Appellant and were put to use for the purpose of business during the year under consideration. 13. That on the facts and circumstances of the case, the learned AO/learned DRP has erred in disallowing additional depreciation amounting to INR 2,18,20,290/- claimed by the Appellant on additions made to the 'plant and machinery' block of assets during the year. 14. That the learned AO/learned DRP has erred in not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the fact that the additional evidence has not been verified by the TPO/DRP, we deem it fit to remit this issue back to AO/TPO for fresh consideration and decision in accordance with law, after providing reasonable opportunity of being heard to the assessee. The assessee is also directed to produce all the relevant details and evidence in respect of the claim and cooperate with the remand proceedings. It is ordered accordingly. 57. Ground Nos. 19 to 24 regarding disallowance of special discount u/s. 40(a)(ia) of the Act are as follows:- "19. The learned AO/learned DRP erred in disallowing the special discount relating to AY 2012-13 in the direction passed for AY 2013-14 which has already been disallowed by the Hon'ble DRP in their directions passed for the AY 2012-13. 20. Without prejudice to the above, the learned AO/learned DRP has erred in not appreciating the fact that the special discount granted to the dealers who are also the customers is in the nature of discount on special price clearance quote and is not in the nature of 'commission' payments warranting deduction of tax at source under section 194H of the Act. 21. That on the facts and circumstances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following key features of the arrangement with its dealers/distributors: - The title to the goods, risks and rewards in the goods pass to the distributors on delivery of the goods by the Assessee; - The goods sold by the Assessee to such distributors is reduced from the inventory of the Assessee and reflected accordingly in its accounts as sales; - The recovery against the sales made by the Assessee is not contingent upon the sales made by the distributors; - The Assessee only gives a discount to the distributors on the goods purchased by them; - The distributors invoice the retailers/ consumers in their own names and earn a margin on the difference between the value of sales effected by them and the price paid to the Assessee; - The Assessee does not control the operations of the distributors; - The Assessee does not restrict the distributors from appointing sub-distributors. i. Once a party agrees to act as a Regional Distributor ("RD") and signs an agreement, such RD shall abide by the conditions of the agreement and shall be eligible to receive price discount on the distributor price. The discount given to distributors on the sale price is sales discount in norm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g its real nature. The Learned counsel for Assessee reiterated that the said expense is in the nature of special discount given to its dealers/ customers and not in the nature of commission as contended by the lower authorities, so as to attract the applicability of section 194H of the Act. It was also submitted that the Assessee's stand on identical payment that it was not in the nature of Commission attracting the provisions of Sec.194 H of the Act was accepted by the AO in AY 2015-16 and no disallowance was made. The learned DR relied on the order of the DRP. 34. We have given a careful consideration to the rival submissions and are of the view that the issue with regard to the question whether the payment in question is in the nature of discount or commission should be set aside to the AO/TPO for fresh consideration denovo in the light of the submissions made before us, the case laws cited and the real nature of the transaction and not to conclude only on the basis of entries in books of accounts and nomenclature used therein. The AO and TPO will afford opportunity of being heard to the assessee in the set aside proceedings." 59. Respectfully following the above decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s added back the aforementioned claims without providing cogent reasons for the same in the draft assessment order. 30. That in proposing the aforementioned disallowance, the Learned AO/ learned DRP has disregarded Form 3CEA obtained by the Assessee from a Chartered Accountant which certifies that the capital loss on account of slump sale has been computed correctly in accordance with the provisions of section 50B of the Act." 65. The assessee has entered into business transfer agreement for sale of tooling parts business as a going concern for a consideration of Rs.10,64,80,000 and claimed capital loss of Rs.1,67,30,000. The AO called for details regarding calculation of capital loss. From the details furnished by the assessee, the AO noticed that the assessee made a deduction of Rs.94.70 lakhs towards "claims made by buyers" from the sale consideration. The AO rejected the claim stating that slump sale is a transfer of undertaking as a whole and no deduction towards any liability can be allowed on the same. He also stated that the assessee has not provided any proof as to how the amount of Rs.94.70 lakhs is arrived at. 66. The DRP confirmed the action of the AO on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X
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